Published on 11/01/2018 4:21:14 PM | Source: Motilal Oswal Securities Ltd

NBFC Sector - ARCs & stressed assets: Glimpse of a better tomorrow? - Motilal Oswal

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ARCs & stressed assets: Glimpse of a better tomorrow?

The Insolvency and Bankruptcy Code (IBC) is a landmark legislation that aims to offer (i) a time-bound resolution process for stressed businesses, and (ii) liquidation for unviable businesses to provide relief to their lenders. The act is also aimed at bolstering investor confidence by eliminating the existing complex judiciary framework and addressing the ballooning NPA situation in India in a decisive and time-bound manner.

We hosted the ‘ARCs and Stressed Assets Day’ to understand the challenges and progress in stressed asset resolution in India under the new regime. Several industry experts participated, including Mr Sumit Khanna (Partner & Head of Corporate Finance and Restructuring Services, Deloitte India), Mr Dhaivat Anjaria (Registered Insolvency Professional), Mr Eshwar Karra (CEO, Phoenix ARC), Mr Siby Antony (MD & CEO, Edelweiss ARC), Mr Pramod Gupta (CFO, ARCIL) and Mr Abhijeet Das (Principal Associate, Cyril Amarchand Mangaldas). We present our key takeaways.

* Promoters and lenders are more proactive in settling their cases: One key impact of Insolvency and Bankruptcy Code (IBC) 2016 and RBI stepping in to mandate banks to refer large accounts to NCLT is that both lenders (to avoid steep provisioning) and promoters (keen on maintaining their ownership) are more proactive in settling their cases before they are referred to the NCLT.

* Higher capital requirement for ARCs has led to more all-cash deals: Fuelled by aggressive sales to ARCs by banks, total stressed assets under management by ARCs have increased to ~INR1t. With minimum capital requirement of ARCs buying stressed assets having gone up from 15% of sale value to 50% of sale value with effect from FY18, ARCs are buying more assets at steeper discounts in all-cash deals.

* MAT eligibility for carry forward losses to encourage more sales: A new tax law has been passed that allows carry forward losses under previous write-backs to be deductible for MAT. This is expected to encourage more sales to ARCs.

* Listing of SRs to allow more liquidity: The Securities and Exchange Board of India (SEBI) has allowed for listing of Security Receipts (SRs). The listing proposals are expected to be finalized and floated by June 2018. There are 450 SR trusts in India, and allowing their listing will allow more liquidity in SRs as an asset class – a positive for the industry, in our view. However, as of now, there is no clarity on whether or not promoters of defaulting companies will be eligible to buy back SRs of their own companies at a discount.

* More NCLT cases now being referred by financial creditors: A total of 500 cases have been referred to NCLT, of which 25-30 have been resolved/liquidated. Most of the initial cases were referred by operational creditors, who saw this as an easy way to recover their dues. However, more of the recent cases have been referred by financial creditors.

* Disclosure of liquidation value made non-mandatory: Under the amended laws, disclosure of liquidation value of NCLT-referred cases has been made nonmandatory to ensure objectivity of bidders. One possible reason for this is to prevent banks from pressurizing asset valuers to provide inflated liquidation values to influence higher bids.

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